Brookfield renewable attractive dividend, but future growth may be limited – brookfield renewable partners l.p. (nyse bep) seeking alpha 76 gas credit card login

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Brookfield Renewable ( BEP) (TSX:BEP.UN) operates renewable power generation facilities around the world. The company is a good investment choice due to its inflation-protected power purchase agreements, good track record of dividend growth, geographically diversified power generation assets, and low maintenance capital expenditure. However, we are concerned about its limited organic growth, the possibility of a lower re-contracting price, and the impact of a rising treasury yield on its share price. Since we are in the late stage of the economic cycle, and treasury yield tends to move higher in this stage, investors should exercise caution and patiently wait for a better entry price.

About 92% of Brookfield Renewable’s power generation is contracted with an average power purchase agreement (“PPA”) term of 15 years. The good thing about this is that a large portion of these PPAs have incorporated an inflation index in the agreements. For readers’ information, many renewable power generation companies do not have inflation protection in their PPAs.

Brookfield Renewable’s capital expenditure is quite low. In 2017, its adjusted sustaining capital expenditure was $68 million. This only represented about 11.7% of its funds from operation (“FFO”). In the past quarter, its sustaining capital expenditure only represented 10.3% of its FFO.

Earlier this year, Brookfield Renewable announced an increase to its dividend from $0.4675 per unit to $0.49 per unit. This represents an increase of about 4.8%. At today’s unit price of $30.75 per unit, its dividend yield is about 6.4%. While the increase was not big, the company has consistently raised its dividend in the past few years. In fact, the company has grown its dividend at a compound annual growth rate (“CAGR”) of 6% since 2012.

Brookfield Renewable has a portfolio of geographically diversified assets. As the pie chart below shows, its power generation assets are located across the globe: 60% in North America, 20% in Brazil, 15% in Colombia, and 15% in Europe. This helps to reduce the risk of unfavourable weather pattern in one specific region of the world.

In the next 5 years, Brookfield Renewable will have to renew about 8,290 GWh of annual power generation (see table below). While Brookfield Renewable continues to benefit from a higher market price in Latin America (Brazil and Colombia), it may face an unfavourable re-contracting price in North America. As the table below shows, the current market price (February 2018) was about $1 below its current contract price (about 2% difference). Investors should keep in mind that Brookfield Renewable’s future FFO may be impacted if the market power price drops considerably.

One of the main reasons why Brookfield Renewable’s payout ratio increased from 2014 to 2016 (see chart below) was due to the fact that it achieved below average long-term-average (“LTA”) power generation. As Brookfield Renewable’s power generation returned closer to its LTA in 2017 and 2018, the company’s payout ratio also steadily improved. While the company pays an attractive dividend, its dividend payout ratio can fluctuate quite a bit depending on weather patterns.

Brookfield Renewable does have a development pipeline that should be able to increase its FFO. As the table below shows, the company’s development pipeline will increase its power generation capacity by 187MW. Once they are completed, it will increase its total capacity by about 1.1%. In my opinion, the development pipeline will not have any material impact in the near term, especially because many of these projects won’t be completed until post 2019. In order for Brookfield Renewable to grow its FFO, it will have to rely on mergers & acquisitions (“M&As”). Since management indicated in the conference call that they are taking a selective approach towards M&As, there will likely be fewer acquisition announcements than in the past.

Brookfield Renewable is often perceived as a bond proxy stock due to the nature of its business. As a result, its share price can be impacted negatively by a rising treasury yield. Below is the chart that shows Brookfield Renewable’s share price and the 10-year treasury yield in the past 5 years. As can be seen, the company’s share price is inversely correlated to the 10-year treasury yield. We are now in a rising interest rate environment, and treasury yield typically goes up as the interest rate goes up. I believe Brookfield Renewable’s share price will continue to be weighed by the rising treasury yield.

We like Brookfield Renewable’s inflation-protected PPAs, good track record of dividend growth, geographically diversified assets, and lower maintenance capital expenditure. However, we are concerned about the company’s limited organic growth, the possibility of a lower future re-contracting price, and a rising treasury yield. Since we are in the late stage of the economic cycle, and the treasury yield tend to move higher in this stage, investors should exercise caution and patiently wait for a better entry point.